Assignment Questions: 1. Describe the basic components of the current performance measurement system. 2. What are the problems with the current system? 3. What's the long-term goal for Purity Steel? Does the current performance measurement system align managers' incentives with that goal? 4. Using the following two independent situations, calculate the ROI and ROI bonus for each branch both before and after the investment opportunity. Comment on any noted differences. Example 1 Base Facts Branch A Branch B Profit before taxes $250,000 $1,000,000 Investment $5,000,000 $5,000,000 ROI ?? ?? ROI Bonus ?? ?? New investment opportunity to invest $1,000,000 to earn $100,000 per year Base Facts Profit before taxes Investment ROI ROI Bonus Example 2 Branch C Branch D $250,000 $2,500,000 $1,250,000 $12,500,000 ?? ?? ?? ?? New investment opportunity to invest $1,000,000 to earn $200,000 per year 5. Using only Example 1, calculate the residual income for both branches both before and after the new investment opportunity, using a capital charge of 5%. Comment on any noted differences. 6. What are the measurement alternatives involved with using ROA as a performance measure? For example, in what ways can income be measured? In what ways can assets be measured? 7. What action should Higgins take in response to the question raised by Larry Hoffman, the Denver Branch Manager? 8. In your view, what are the advantages and disadvantages of ROI as a performance measure? What explains its longstanding popularity?